My Boat’s Buyer Is Not Making Payments. What Do I Do Now?
When a borrower defaults on a loan that is secured by a preferred ship’s mortgage, the lender may, in most cases, foreclose on the boat under either a state law procedure or a federal law procedure.
The state law procedure involves a private repossession and sale of the vessel, without directly involving the legal system unless a dispute arises from the repossession or sale. The federal procedure is a “judicial foreclosure” that is initiated by the filing of a lawsuit in federal court.
The choice between these two procedures is usually determined by the amount of money that the lender is prepared to spend.
Our reader was thinking of the federal judicial foreclosure and a “civil arrest” of the vessel when he asked about the involvement of the U.S. Marshals in the foreclosure. A “civil arrest” of a vessel may occur when a lender or other lienholder files an “in rem” lawsuit in federal court to enforce a lien or mortgage claim, and the process calls for the U.S. Marshals to take custody of the boat. If the lender or lienholder proves its claim to the court, the judge may order the boat to be sold at an auction conducted by the Marshals.
A judicial foreclosure has many advantages over a private repossession conducted under state law. The Federal Ship Mortgage Act (46 U.S. Code sec. 31301) is a very “lender-friendly” body of law, and it preempts state law in most areas of consumer protection commonly found in state law.
The lender’s obligations are almost entirely limited to the obligations set forth in the mortgage and the underlying promissory note. And since these documents are usually drafted by the lender, they are pretty one-sided — so, they typically allow the lender to initiate the foreclosure procedure without providing any notice to the borrower.
The federal procedure has many other advantages. The “repossessor” in a judicial foreclosure is a U.S. Marshal with a badge and a gun, which dramatically reduces the risk of a breach of the peace during the repossession. The boat is kept in the custody of a court- ordered custodian until it is sold or the lawsuit is otherwise terminated.
And the sale of the boat is conducted pursuant to a court order by a federal district judge, who will order the boat to be sold free and clear of all liens. The “commercial reasonableness” of the sale is not an issue.
Conversely, a private foreclosure under state law calls for the boat to be taken by a licensed private “repo” agency and sold through a private sale or through a yacht brokerage. The sale cannot be guaranteed to be free and clear of liens, so the “commercial reasonableness” of the sale may be an issue. The repossession must be conducted without a breach of the peace and without violating other laws.
A state law repossession also requires compliance with certain consumer protection laws, including notice to the borrower and allowing him or her an opportunity to bring the loan current and redeem the vessel.
The boat is typically held by the repo agency while awaiting sale, rather than by a court-appointed custodian — so, the security of the boat may be an issue. The lack of judicial oversight during this process opens each of these steps to scrutiny, and they may be challenged by the borrower in litigation during or after the repossession and sale.
A federal judicial foreclosure is almost always the better choice for a lender. The entire process, from taking custody of the boat through sale and distribution of proceeds, is designed for the efficient and orderly recovery and disposal of the vessel.
It is, unfortunately, very expensive. So, the choice of state law vs. federal law often comes down to the size of the lender’s budget. Costs and expenses vary significantly from case to case and between different federal court districts, but legal costs well in excess of $30,000 are typical.
In the end, the question of whether to foreclose on a defaulted mortgage through private repossession or to initiate a vessel arrest will be a question of numbers.
Regardless of the risks associated with a private action, a $50,000 sailing yacht with no equity simply does not justify the expense of a judicial action. However, a million-dollar yacht will call for a different strategy, regardless of the boat’s equity position.
It may boil down to a case-by-case analysis, and lenders are well advised to contact an experienced maritime attorney for advice.